Unlike most goods you buy, where the price is clear and may well be negotiable, many financial services cost you extra in the shape of charges and commissions which add significantly to the cost of the services you buy, or reduce the amount actually invested in your chosen items.
Best known are the initial charge which fund managers make on many investments such as unit trusts and Personal Equity Plans and on money invested in pension funds. Traditionally the initial charges have taken 5 per cent or even more of the investor's money, but the Financial Services Act has forced managers and providers to reveal their charges as well as the commissions they pay to salesmen and intermediaries, which traditionally come out of the initial charge on investors. Many brokers and financial advisers prefer to charge a fee and return their commission to the investor.
Consumer awareness and competition as well as the introduction of things like index tracker funds and corporate bond PEPs, which are cheaper to run, has also forced managers of many mass-appeal funds to cut initial charges to 3 per cent or even zero.
Fund managers also charge an annual management fee, deducted either from the annual dividends or from the capital value of the fund. Annual charges have traditionally been 1.25 per cent to 1.75 per cent, but average rates have fallen as low as 0.5 per cent and anything more than 1 per cent is now uncommon.
Some managers charge an exit charge if investors want their money back early. Another often unnoticed charge is the spread between the bid price which investors pay for unit trusts and the offer prices at which other investors are simultaneously selling units back. The bid to offer spread is traditionally 5 per cent, and applies right through unit-based financial products including pension funds, PEPs and unit-linked mortgage plans.
All Pension funds are subject to charges, including commission paid to salesmen, which must be declared. Even now, however, providers only have to indicate charges indirectly, by projecting the net returns they might secure for investors after deducting their charges, assuming consistent growth rates of 6, 9 and 12 per cent on money invested. These projections are unlikely to be accurate figures and no two providers will achieve the same results. But it is only by comparing the projections based on the same assumptions that investors can work out that the differences are due to different levels of charges.
Investors also pay commissions to stockbrokers on buying and selling shares, including investment trusts, but computer-based efficiencies and increased competition have reduced commissions to as low as 1 per cent on small deals and 0.25 per cent on larger transactions, with a minimum charges as little as pounds 5-pounds 7 on selected deals.